With financial technology disrupting the industry, banks are turning to startups to help them innovate, and startups are turning to banks to help them scale. Banks are increasingly connecting with financial technology startups to reach the unbanked and underbanked. In the report, The Business of Financial Inclusion: Insights from Banks in Emerging Markets, CFI and the Institute of International Finance (IIF) found that many banks are building a vast ecosystem of partnerships to expand their reach and service offerings and to improve internal processes. This growing interaction between legacy providers and new providers is taking a variety of forms. Many larger banks are engaging with startups in multiple ways, from partnering with the firms to providing support to incubate new firms. In my deep-dive into the ecosystem of this engagement, I discovered three primary types of interaction.
Partnerships: Banks outsource operations partly (white labeling) or fully to a financial technology startup that bears the regulatory risk.
Investment and Acquisition: Many banks have their own venture capital funds and accelerators to encourage the development of financial technology startups and to invest in or acquire new companies with relevant offerings.
Internal development: In some cases, banks aim to innovate internally, by building integrated solutions within their own innovations centers. While this model does not involve coordination with a separate startup entity, it aims to replicate the agility of a startup.
I charted out how these various strategies play out in three large global banks. Below are a few examples of how each bank is innovating through all of the channels listed above.
As was outlined in the first post of this series, we explored four areas in which banks partner with fintech companies: blockchain and digital payments; lending and credit scoring; KYC and compliance; and financial capability building. Improvement in these areas of operation could mean great improvements in access and quality of services for previously unbanked and underbanked customers. By investing in relationships with the fintech startup community, commercial banks are investing in technological improvements that are already having, and will continue to have a great impact on how they can serve new customers. For me, a current customer, this may mean the ability to electronically pay a friend directly from my bank account. For an unbanked person, this may mean the ability to access an account or loan for the first time by using a thumbprint or other biometrics to verify identity. For financial services, partnerships can turn competition to industry acceleration, where everyone wins.
This post is part of a multi-post series focused on partnerships between commercial banks and financial technology startups. You can read part one here.
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